GST taper 300->190->110 bps delivered.

On product mix - in an environment where bond yields hold and yield curve favors better guarantees while bank deposit rates have gone down, one would expect a comeback in non-par. But par is still outperforming, non-par is not showing strong growth in your case driven by the banca channel. What is putting you in a situation where non-par is not bouncing back? Second, on the Labor Code impact of Rs. 100 crore - is it largely a gratuity shortfall pertaining to permanent and fixed-term employees? Is this a one-time impact and on an ongoing basis there should be no further impact?

Vibha Padalkar: Second question I will take first. Yes, it is a one-time impact and should not have any material impact on an ongoing basis. Niraj Shah: I think we started seeing some encouraging signs, as we had mentioned in the previous interaction, that we do expect in Quarter 3 (Q3) non-par to start picking up. It has happened now. In Q3, I think the non-par mix is in the 20% range. We had closed H1 at about 17-odd percent. So that has been a meaningful shift that has started to happen, and we expect more of that to happen in the coming quarter as well. We have had a couple of new product introductions, and like you rightly mentioned, the macro environment as such is conducive to a long-term guaranteed product of this nature. However, we still maintain that the momentum in unit-linked continues fairly strong, as you can see from the nine-month numbers, as well as for the quarter, the unit-linked mix continues to be upwards of 40%. So, that is definitely still very much visible and continues. On the non-par side, some traction has already started, and we will see more of that as we go forward as well. Also, we do see the intensity of competition in terms of aggressive pricing still there on the ground. We are fairly calibrated, like Vibha mentioned in her initial comments about the kind of business that we are happy to take on board. So, we obviously are trying to do whatever we can through new product introductions, energizing the salesforce, and using the macroeconomic environment to put through more of this product, but at the pricing which makes sense to us and risk management that we are comfortable with.

First, are negotiations with distributors on the GST cut completed and from 1st January have they moved to new terms and conditions? Second, on the really good performance of persistency on the 61st month - if that trend has improved, we should be seeing positive bigger benefits in operating variances, but operating variance seems to be negative. Help me understand. Third, on retail protection - sum assured has been higher; the math shows gross margin on some products is much higher to achieve those margins. Is it in the retail protection or even in ULIP, the rider attachment continues to be high, and that is why overall VNB margins have been achieved?

Vibha Padalkar: On the first one, yes, short answer, negotiations were completed. And it's moved on in terms of what we said that we would do. On the third question, the bettering of margin profile, happy to share, is almost across all products, including some what you said, but it is also in unit-linked, it is also in par, it is everywhere. Eshwari Murugan: The improvement in the 61st month persistency has given us some positive operating variance. The overall operating variance is negative, mainly because of lower 13th month persistency, while some of the reduction or the lowering of the persistency has been factored in our assumptions because these assumptions are based on ticket size, and the reduction in persistency is mainly because of lower ticket size. We do see a further drop from the last quarter, and this is mainly coming from the business written in the last two to three months of last year. And we are seeing some lower collection, and that is why there is a negative operating variance. This could be because of some specific cohorts, and we have taken some measures as Vibha mentioned in her opening speech. And we hope that going forward, we will not be having some persistency stresses. But what has already happened, that is what is reflected in the negative operating variance.

Just one follow-up on distributor negotiations - while details can be left out, is it fair to say wide and across with every distributor the negotiations have been completed and whatever has to be passed on has been passed on?

Yes, as part of the GST strategy that we spoke about earlier, that we will take a couple of measures. The discussion with the distributors, all of them, are concluded, and we have moved on to the revised commercials.

The measures we took on GST on commissions or anything of that kind - is it already reflected in nine months and 3rd quarter margin, or do we see the benefit play out in subsequent quarters? You said 300 bps impact you managed to reduce to 200 bps - 200 bps is partial because you might have done mid-quarter, so maybe the benefit will be more in 4th quarter. Second, despite GST impact, will you attribute the entire holding up of margins from nine months to six months predominantly to protection mix change or did the yield curve benefit also play a meaningful role for supporting those margins?

Yes, second question first. It is a combination of protection as well as the yield curve going up, some benefit of that, as well as inherent margins in unit-linked products because of higher level of protection. So, like Vibha mentioned, it is a combination of all of these things across product categories. As far as the GST impact is concerned, yes, some of these measures have happened mid-quarter after the GST change was announced towards the end of September. We put in place some of these measures with distributors, and you will see some part of it was factored in Quarter 3. You will see more of that in Quarter 4 and progressively from here on. As far as the less than 200 basis points impact is concerned, yes, that also is something that you will see lower of as we go progressively. Our intent was to try and neutralize it over three to six months. So, Quarter 4, we would expect to see a much lower impact than we saw in Quarter 3.

Niraj, structurally, will we be able to arrest the entire impact of GST to less than 100 basis points, maybe if I look at from FY27 perspective?

So, we said that FY27, we would like to start on a clean slate, having digested the GST impact completely. So, on a run rate basis in March, we want to get to that position. So, when we start Quarter 1, we would want to then peg ourselves to what we achieved in FY25. So, that is really what we are trying to achieve.

On growth - we are a little lower than the industry, even in the 3rd quarter, largely soft because of the banca channel which grew for nine months by just 2%. If we end up at 11-12% growth in the current year, then this banca reviving back and getting into high teens or mid teens kind of growth - is it possible in FY27, or how do we see growth play out beyond the current year?

So, current year growth, yes, banca channel has seen lesser growth for this year, but if you look at a two-year CAGR, I think the growth is reasonably strong. And we do believe that the channel will continue to deliver good growth going forward. We also have done a lot of investment in proprietary channel around agency and all, and we are seeing results for that also coming in. So, we are quite optimistic about the growth into the next financial year that all channels would then be firing at the pace that they are supposed to fire. Some of the portion, I think, which Niraj also spoke about, especially around non-par, is that some places in this quarter, we might have not participated to the extent that we could have participated because of the commercials that we wanted to participate at and the quality of business that we wanted. So, I think that is something that we keep on anyway playing tactically to ensure that we always have a good quality book.

Extending on the previous question on Bancassurance - could you attribute the reason for slow growth in these nine months? Also, the product mix in the Bancassurance channel is still skewed towards ULIP. What factors are impacting the segment?

So, like I said, there are multiple things, and it kind of depends on which partner and which bank are we looking at. There is an issue of mix. There is an issue of competitive aggression and some unrealistic pricing. And there is an issue of some banks going with multiple number of partners. A large portion of this actually got played in Q3. So, H1, though, remained reasonably strong, Quarter 3, we saw a lot of this playing out. And we will play this tactically. We will do the business that we feel is good business to do and we will do that. So, I think we are quite confident that the channel will, over a period of time, continue to deliver good growth.

What gives you confidence that this strategy of bank partners taking business further will play out ahead? What exactly are the strategies you are taking?

Vineet Arora: So, we have seen this in the past also, that there could be tactical aggressive strategies being played by different players. And that has a life of its own. It cannot continue forever. So, it has a life of its own. Sequentially and two-year growth is what we do focus on, and we are quite confident that the CAGR over two years is good and is in line with what we expect it to be. Quarter 3 is one aberration where we see overall excessive competitive pressure. And as this competitive pressure kind of levels out, we will be back in the similar growth for this year as well. Vibha Padalkar: I also want to add, it is not significantly lower. It is a shade lower. So, if I were to look at first quarter, at our overall growth, APE growth of 13%, Bancassurance grew 100 basis points lower. Okay. If I were to look at fast forward to Quarter 3 versus the 13%, it has grown 300 basis points lower. So, this kind of cyclicality is something, it might be a base effect. It might be something else that is happening. It might be because banks might have grown, but due to irrational pricing, especially if you are competing with unlisted players, you tend to have that, and I have called that out before. A non-par product at a negative spread might not work, but no one can indefinitely be competitive either on pricing and/or on underwriting. And we have seen these cycles even amongst different players as counterparties with whom we are competing. Sometimes one is aggressive, sometimes another one is aggressive, and so on. So, it comes around. So, I just want to put in context that it is not, for example, 50% lower. It is a shade here and there. And we have no doubt in our mind that this is a cycle. We have been here before. Like what Vineet says, there will be some quarter here and there, and it is a matter of time before it evens out. And we do look at it on a two-year CAGR basis as well. Niraj Shah: Yes, and maybe just to add to that, I mean, if you were to take a slightly longer-term time frame, maybe 6 to 12 months and beyond, I think the environment that we are stepping into is going to require a lot more calibrated business in terms of changes such as risk-based capital and movement to international reporting standards. Some of these will actually put out very clearly the consequences of some of the things that we discussed, so I guess more calibrated, balanced growth is something that I think we can all look forward to. And with that, we can expect the growth to continue to be fairly strong.

The main thing is that growth in our individual business has been lower than some peers in the recent quarter. Can we come back to the industry growth or better than at least the peer growth in times to come?

Yes. I have no doubt in my mind, that is what we have been tracking. And while there will be some cycles up and down, we are talking about top line. I think, equally, we need to look at margins. You will appreciate that, along with quality of business. So, as a responsible listed company that wants to build good quality business, we will continue to triangulate between this. All things being equal, like you see on term today, there is a reason why we are perhaps right up there in terms of retail term. And that is the overall objective and direction in which we need to head. Same thing at our Bancassurance partners. It is not just the top line, but what is our wallet share of VNB? That also is something that we track very closely. And while we are not disclosing at a partner level, but our wallet share at key partners has continued to go up.

So, is it fair to say this 1.1% impact of GST will be a much smaller number in the next quarter in Q4? Is that a right way to think?

No, the 1.1% number that you see is actually of just 3.5 months, that is reflecting in this. So, for the third quarter, the impact was actually 190 basis points. And annualized basis, we had said was 300 basis points. So, you will have to keep that in mind, while we will obviously, when we talk to you in April, we will try and bring down this impact for the quarter on the lines of what we are talking about in the 100-odd basis points kind of range. That is something that we try and execute.

If I look at product-level persistency on a nine-month basis, the non-par bucket is where we see a little pain in the early buckets. In terms of the product category or channel really driving this pain - can you give some color? Second, if we think of the next one or two years given the competitive intensity across multi-architecture channels, what confidence do you have in managing your counter share at these channel partners?

Vibha Padalkar: So, I will take the second question on counter share. It is already in play. And at our largest distributor, HDFC Bank, it's been around for a while, several years. And all the new partners, like I said, we are in almost all relationships or material relationships, we are amongst the top two partners. And that is today as well. Also keep in mind the point that Niraj was saying that as we move towards Ind AS, ability for some of this disruption due to more attractive economics and so on, as well as possibly looking at rationalization of how distribution commissions are paid. So, a whole host of things up in the air that will hopefully lead to a little bit more long-term value-building proposition. And with or without that, we are fairly confident as a combination of being known as a product innovator, giving best value proposition, holistic proposition. Yes, we don't really see that as being a concern. Eshwari Murugan: The non-linked persistency has dropped materially, you are right. But if you look at it, the persistency in the last 1-1.5 year had gone up significantly from the previous period, mainly because of very high-ticket size policies that got sold when the tax rules changed. So, if we take that out, and that is already factored in our assumptions, because as I mentioned earlier, the persistency assumptions are based on ticket size. So, we knew that the persistency is going to be lower compared to the previous period. If we leave that out, then the persistency drop is not much, maybe around 60-70 basis points lower than what we would have expected. And as we have identified the cohorts where we see this reduction in persistency, and as we have taken measures, we are quite confident that the persistency will be comparable to what we expect in our pricing and in our margin computation. We may not see those high levels of persistency as earlier because the ticket size is much lower due to the changes in the tax rules. Vibha Padalkar: And just to add, it even strengthened further because there was going to be this tax withdrawal. So, even the persistency or poorer persistency in the normal course of customer behavior reduced significantly because post that period, no other product was going to be as attractive because it was completely tax-free, even policies above Rs. 5 lakhs. And so, it is really the comparison is against a cohort that was a special cohort. This is a more normalized behavior pattern, and it is still, as you know, this is on Slide 28 of our Investor Presentation. You will see that even despite that, traditional savings, like Eshwari said, is marginally lower, but not significantly lower.

Two questions. One on product pipeline - last call we mentioned the variable annuity product. Could you share more color? Second, on the highest sum assured ULIPs - currently more than 1/4 of our mix for ULIPs. Is that growing faster than the overall ULIPs growth? And what is the margin differential between the two variants?

Yes, so I think on the product side, we continue to bring in new products from time to time across different categories. In fact, the most recent one was on the protection front. I think, those products are doing extremely well. We have also had some introductions on the non-participating side. I was referring to that a little while back. We look forward to some of that panning out in Quarter 4 and beyond. Variable Annuity, yes, it is a very recent change, a very important regulatory change that has happened, which allows us to offer this kind of a proposition. We look forward to launching that sometime in the next couple of months. And while we do expect that product proposition to keep getting refined as we are able to use more and more hedging instruments over a period of time, but we do believe that it is a fairly strong proposition that we will come out with in the market. And we do expect some of our more discerning customers on the annuity side to start looking at that seriously. But I think we will talk about it once we have had some experience on that. Yes, the highest sum assured ULIP, like you rightly said, is about a little more than a fourth of our unit-linked business now, and the margin profile of that is a lot stronger than the base ULIP. We had mentioned this in the past as well. It kind of starts converging towards margins on the participating business, and it is fairly healthy and strong with a high level of persistency as the customers are aware of what they are really buying, given the kind of mortality outflow that happens on account of a product like that. So, it is something that is definitely working very well for customers, and it is working well for the company as well.

Given the initial expectation that GST impact would be much higher than the currently visible 110 bps, and probably in 4th quarter even much lower impact - what are the levers playing out for you to have this better outcome? Second, can we say given next year you want to start with a clean state, probably a strong likelihood of improving margins and going back to your earlier trajectory of 25.5% to 26% VNB margin?

So, on the GST, as it was introduced end of September, and we had our opportunity to talk to you about it in October, what we had said is that we had assessed the impact at about 300 basis points on an annualized basis. And we said that we will attempt to bring it down progressively over two to three quarters. So, the first quarter, we managed to execute on the lines of what we had wanted to do to bring that 300 basis points down to near 200 bps. That is something that we managed to do in the 3rd quarter. Again, our aspiration is to try and bring down that impact to maybe odd 100 basis points in Quarter 4. We will try and execute towards that as well. And basically, by the time we get into FY27, we basically want to put ourselves in a position to grow our margins from FY25 onwards. So, I think that is something that we will attempt to do. And the initiatives, again, as we had called out, of course, the biggest catalyst is the GST change that has enabled the protection growth to be higher than what it was pre-GST. So, that is one thing that we expect that to continue. Second is also in terms of the embedded protection side in unit-linked products is something that we have seen sustained performance on that front now. That is also something that is helping the overall new business profile. Credit life as a segment, which is pure protection, is something that has started to do really well, 25%-odd growth in this quarter and 15%-odd for the period. With the credit growth in the overall system being now at fairly strong levels and expected to continue to improve as we go forward, that is also a business line which further calls on this front. As we start moving towards the growth numbers that we are capacitated for, the negative variance that you see on account of fixed cost leverage is something that we would expect to try and bring down over time as well. So, multiple such things which will help us, apart from our basic thought process of balanced mix and diversified distribution and risk management being very important, should help us neutralize some of the impact around all the recent big changes that have happened, starting with surrender value changes followed by GST and now more recently the Labor Code. So, I think that is something that we will try and achieve.

On term business - there has been impressive growth, but on the Banca side I guess there is still catch-up yet to be reflected in all the channels other than Banca. Anything specifically that you are doing or need to change - realign incentives or anything that can improve protection in the Banca channel?

Vibha Padalkar: Nischint, actually, while it doesn't reflect as much because Banca overall volumes are also high, and savings also usually does well. So, the growth in protection in Banca in Quarter 3 has been more than 40%. So, like I said, ticket size-wise, it will take time because you have to sell 2.5 policies of protection for it to be equal to one policy of savings in Bancassurance. That is roughly the math. So, it will take time, but it is growing fairly handsomely there. And hopefully, it will start showing. It is not showing up right now on Slide 17 because of rounding, but there is a lot going on over there. And other thing is riders plus moving to, yes, high sum assured unit-linked. So, all of that, if I were to look at, and that is a point I made, we are looking especially at HDFC Bank as to what is our counter share on VNB, and all of this has helped us improve our counter share of VNB rather than just looking at top line. And you also mentioned incentives and so on. So, there is a lot of discussion that has already happened. There is buy-in at both ends to focus on this without, of course, disturbing whatever is going well. And we have also launched protection on a group platform, which this will not reflect. Also, in terms of over-the-counter retail platform. So, lots of things happening. Vineet Arora: So, protection in bank might not be just looked at from term, even though term has also grown significantly in this quarter in the bank channels. But overall protection, if you look at it as a combination of term plus high sum assured ULIP plus riders plus the new initiatives that we are doing with the bank, it is quite in line with what the organization has achieved.

On the hybrid high sum assured ULIP - what kind of sum assured multiple do you offer on the annual premium? Is it in the range of 120-125%, 25x of the annual premium or lower? The concern is there could be substitution effect if you offer very high sum assured as a multiple of annual premium. Second, what aspirations do you have on Tier 3, Tier 4 markets with this agency rollout that is ongoing? Any targets in terms of overall business mix going forward?

So, I will take the first question and pass it on to Vineet for agency and Tier 3, Tier 4. So, average sum assured on unit-linked products is in the 30x kind of a range, while there are customers who prefer to take even higher. But on an average, it is in the 25x-30x kind of a multiple, which is significantly higher than the 10x that we used to see at the portfolio level. Riders sit on top of this. So, it is a combination of high sum assured as well as riders that is actually making this category a lot more protection-oriented for customers and obviously margin accretive for us. We are fairly watchful in terms of how we offer this and are tracking persistency reasonably closely on this one. And that is a fairly calibrated manner in which we are approaching this. We are not so bothered about the substitution effect because we are fairly agnostic to how customers buy protection from us, whether it is through group credit life products or through return of premium products, pure protection products, or embedded savings. I think whichever way the customer wants to engage with us, we are happy to kind of provide that as long as they understood what they bought, and we get good quality of business through that.

Just one follow-up - Niraj, you are not planning to launch say 125x annual premium sum assured kind of product or this kind of super high sum assured ULIPs?

Niraj Shah: No, we don't see the need for that. While, I mean, on paper, we do have products which offer sum assured as high as 80x also, but we don't really see too many customers actually looking at that at scale. So, we are seeing a lot of rider uptake, which is, we believe, the better way to kind of buy this level of protection. Otherwise, of course, the pure-term protection products are always there. Vineet Arora: Just to take that point a little further, so we do not create any underwriting arbitrage between the categories. I think that is an important point, which could be happening in other places where very high sum assured might make sense on a ULIP platform. So, we are quite conscious of how we underwrite and not creating arbitrage between product categories. And that is why our approach that you see is more balanced between sum assureds and riders and what the customer needs. Just coming to your question on the distribution depth into Tier 1, into Tier 2 and Tier 3 using agency. So, our aspiration for agency channel, I think, very clearly, is to make it grow much faster than the organization growth. We know that we have been behind on the proprietary channels for some time, and it is a catch-up to get to the rightful share that the agency channel needs to have. So, I think that is clearly, I mean, we don't really want to put a number at this stage, but in the market, if you look at it, the agency channel should be contributing to maybe a greater than 25% share in the company.

Probably the same question on persistency - the deviation in the variance we see is largely due to products sold maybe before the surrender norms came in? Second, whether this deviation is more transient or you need to make an assumption change so it has an overall impact on EV?

So, while we expect the impact to be transient because we have already taken measures to ensure that the persistency is back to the pre-change, see whether it is done as an assumption change or operating variance, the impact will be similar because it is only one year impact that is going to come. By the time we are at the end of this year, it will either be reflected in operating variance or in assumption change. It will not be a big difference, unlike other cohorts. If it is like the 49th month or 61st month, then it will impact a lot of business sold in the previous 3-4 years. But fortunately, this is only one year of business that will get impacted.

And the deviation is predominantly in the products which were sold before surrender norms came in, right?

Yes, because on the policy sold after the surrender value change, the experience is still emerging. It will generally take three to four months for the policyholders to pay the premium and be able to reach the ultimate level of persistency. So, the trend indicates that it is not very different from the policy sold earlier. So, the deviation is mainly coming from policy sold prior to October 24.